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Telcos need an OTT strategy to regain lost ground

It is somewhat ironic that Communications Services Providers (CSPs) are struggling with digital transformation, when in reality, their infrastructure is the backbone for other sectors to ramp up their own digital transformation efforts. With change in consumer behaviour prompted by the new breed of digital services and loss of revenues from traditional telco offerings, the need for digital transformation has never been greater.

The OTT Conundrum

Think about the apps most used in our daily lives - WhatsApp, Spotify, Netflix, … - all of these are OTT businesses which have stepped in and filled niches that existed within a CSP’s core offerings. They rely on data connectivity provided by the telcos, but these new digital businesses have eaten into CSP revenues by providing more efficient messaging, communication and media services.

In fact, reports suggest that telcos have lost around $386 billion in revenues in the last six years thanks to the increasing consumer preference towards OTT platforms for messaging and VoIP. As McKinsey points out in their report, messaging, fixed voice, and mobile voice services from OTT players accounted for only 9, 11 and 2 percent of the revenue a few years ago. However, this share could rapidly jump to as much as 60, 50 and 25 percent respectively by the end of this year. It is further predicted that spending on traditional telecommunication services will reduce by around 36% in the coming decade, squeezing CSPs further into a corner.

Now, many of these OTT players are offering their services based on innovative business models including day passes and monthly subscriptions which can be paused or cancelled at any time. Subscription-based OTT services such as Netflix and Spotify are extremely popular with end users since they are convenient, flexible and available at much lower costs compared with traditional services in the space. In addition, companies benefit from subscription billing with a guaranteed a recurring revenue stream. Clearly, it’s a win-win for both consumers and businesses.

Capitalising on the OTT opportunity

There is a certain inertia amongst CSPs - almost a feeling that nothing can be done to counter the growing swarm of digital-first businesses that are encroaching upon the telecoms industry. If CSPs need to play ball, they should remind themselves that they own the critical infrastructure piece which forms the connectivity layers for this new breed of services. However, in order to compete with OTT businesses, CSPs need to take one of the following approaches:

Partner with existing OTT businesses - This is a great way to expand their own position within the value chain and garner a share of the OTT revenue. A lot of CSPs in India have gone down this route of partnering with existing OTT players as they look to gain a foothold in the country. For instance, Airtel has partnered with Amazon Prime whereas Vodafone has joined forces with Netflix. There is a significant opportunity for growth, especially in emerging markets, which can be capitalised by telcos partnering with OTT businesses.

Build advanced networking capabilities fast - Let’s not forget that network services will continue to be the primary growth driver for the telecoms industry. By investing in building advanced network capabilities such as 5G, CSPs can differentiate their offerings with greater bandwidth and lower latency services, including rich communication services and high-definition voice.

Offer value-added services - Operators have access to huge volumes of data which can be mined to build new and improved services based on profiling (subject to data privacy controls). Leading CSPs such as Verizon, AT&T and Comcast are already leveraging this wealth of customer data for marketing and advertising purposes, and telcos can easily repackage this data to help other businesses understand their consumers better. In fact, this might become one of the key strategic plays for the future generation of CSP/DSP.

Monetise the Internet of Things (IoT) - As telcos leverage the platform play for IoT, there will be a lot of opportunities to support new IoT offerings, in addition to fuelling the connectivity layer. They can leverage their existing assets such as CRM, billing and self-service dashboards along with connectivity management, device management and application enablement tools to move up the IoT value chain.

At the end of the day, each CSP must decide which route they wish to take. They can adopt one (or more) of the approaches listed above, but burying their head in the sand and hoping the OTT issue will go away is simply not an option.